In another post, I talked about Agency — the concept of who worked for whom in a California Real Estate Transaction. This brings us to this post’s topic — The Broker Representation Agreements.
Remember that in Agency, it was spelled out that the Seller’s Agent represented the Seller (so far, so good, right?). This legally takes place because of the Listing Agreement, which is actually, according to California state law, an employment contract between the Seller and the Listing Brokerage/Agency. However, unless there is a corresponding legal document that actually employs the Buyer’s Agent, then the relationship between the Buyer’s agent and the Buyer is just implied, not actually spelled out. That’s where the Broker Representation Agreement comes in — it is the employment contract mechanism that allows you, the Buyer, to “hire” the agent and Brokerage to represent you in the transaction and be sure that under the laws of California your rights are protected.
All of the Broker Representation Agreements spell out in detail what the Broker’s responsibilities are under this “employment contract.” This is important for both sides — it is important that you the Buyer know what the Agent does and does not do for you. For example, the Broker/Agent can advise you, but you are the one who decides what to pay for the home, not them. They also cannot give you legal or tax advice. The Broker Representation Agreement also gives the Broker/Agent the authority to act on your behalf to meet vendors such as inspectors, contractors, etc. The Broker Representation Agreement also tells you, the Buyer, what your responsibilities are, and it is important that you read this section to be sure that you understand what your role is.
There are three types of Broker Representation Agreements
Broker Representation Agreement – in which there is no exclusivity and no discussion of type of property — you’ve just hired the Broker for a transaction. There is no discusson of commission in this one. This one might work if you’ve just walked into a home and fallen in love (and you aren’t already working with an agent (hopefully me!) but isn’t the right one for a long term relationship with an agent for reasons explained below.
Broker Representation Agreement – Non Exclusive — This one and the one below are similar, but the distinction between them is that the one below hires the agent exclusively and this one allows you to work with more than one agent. However, you agree that if this agent shows you a particular home and you decide to buy it, you will buy it from the agent who first showed it to you.
Broker Representation Agreement – Exclusive — As the name implies, you agree in this one to work exclusively with one agent. If you buy a home during the period of the agreement, you will owe this agent a commission, so you should buy it from that Agent.
The last two types of Representation Agreements, Exclusive and Non-Exclusive, are a lot more detailed than the basic Broker Representation Agreement. They include a discussion of what type of property you are looking for, what the price range is, and a discussion of the commission percentages or amounts that the agent will be paid on the property, regardless of what the Seller is offering. If the Seller is not willing to pay the commission, you, the Buyer, will be obligated to pay the commission.
Now although your first reaction might be “Why do I care, that’s the agent’s problem!”, the reality is that you want the agent to show you absolutely everything that is available for sale that meets your needs.
Because some Sellers think this is the way to save money, some properties are listed with little to no commissions — I have personally seen properties listed with $150 total commission to the Buyer’s Agent! This is far too little for the amount of time and expertise involved in a typical real estate transaction and most agents would probably just avoid showing these properties without an agreement in place that promised them compensation. Another example is For Sale By Owner — these Sellers will often refuse to pay a Buyer’s Agent, and many Agents would therefore not bother to knock on these doors to see if they could show you these properties.
But you, as a Buyer, do want to see everything that meets your needs, right?
Most professionals like Doctors, Attorneys, Financial Advisors, and Accountants, get paid by the hour. Realtors are some of the only service professionals that only get paid a Success Fee. If you want your agent to dig out that perfect property for you, the weird reality of Agent compensation is that they need to know that there will be a payoff at the end that, as a professional, makes it worth their time and trouble. So one of the two versions of Broker Representation that discusses compensation will actually ensure that you, the Buyer, know you are seeing everything on the market there is to see without any bias by the agent.
In actual practice, if you do decide to make an offer on a property that has offered less compensation than you have agreed to pay in the Broker Representation Agreement, your Realtor can attempt to negotiate this with the Seller as well so that you don’t have to pay it yourself. Or you can make an adjustment for the fact that you are paying that in the price you are offering for the property.
Whether to use the Exclusive or Non-Exclusive agreement depends on the rapport you have with the Realtor. The Realtor will obviously feel the most commitment from you with the Exclusive version, and will most likely “beat the bushes” to find you that perfect home with this arrangement. Not sure if you feel ready to be “Exclusive?” Limit the time period!
And remember… most of the better Realtors in town will not work with a Buyer without either the Exclusive or non-Exclusive Representation Agreement in place Sure, you can get an agent who will — but that’s because they have so much time on their hands,. You want to work with the ones who are busy… because they are good!